EEE 422 notes

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Syracuse University *

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422

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Electrical Engineering

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Jan 9, 2024

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EEE 422 Notes from 8/30 - Sands - Hurricane Katrina destroyed his home and business. - Filed Chapter 7 bankruptcy - He had the opportunity to turn around the failing Detroit business, He saved it from going belly up and made it profitable after a month - I never talked about insolvency or distress in grad school - Insolvency is when you can’t pay debts - There are some people who love chaos, and love the challenge of fixing a business that is in serious trouble - TMA: Turnaround Management Association - Shein - Employees at Rhodes Plastics in Linden, New Jersey, experienced a sudden and shocking event when armed sheriff deputies entered the building and ordered everyone to leave, even without their personal belongings. The company's top officers had failed to convince lenders of their ability to turn the business around, leading to unpaid suppliers and unfilled orders. The incident serves as an example that most professionals will encounter turnaround situations in their careers, where struggling businesses need revitalization. Turnarounds involve making significant changes to redirect a business's trajectory, whether it's a struggling company, an underperforming division, or even a successful enterprise that want to avoid pitfalls. The author draws from decades of experience, and has codified lessons on managing turnarounds, highlighting the need for an entrepreneurial approach similar to that needed in new venture formation. - The parallels between turnarounds and entrepreneurship are significant. Both scenarios involve similar challenges and conditions. Ten common conditions frequently encountered in turnaround situations also apply to entrepreneurial startups: Lack of Cash: Both startups and turnarounds struggle with undercapitalization and lack of working capital. Managing cash flow is crucial for survival. Analytical Needs: Quick decision-making and pragmatic financial analysis are prioritized over traditional accounting methods like GAAP. Accurate cash flow forecasting takes precedence. Hiring Difficulties: Attracting and retaining quality

employees is challenging due to instability. Equity incentives can motivate and retain employees. Disbelieving Customers: Both startups and struggling companies must convince customers of their ability to deliver products or services reliably, overcoming skepticism. Time Sensitivity: Limited time for action requires swift, specific decision-making, and a sense of urgency to motivate employees without causing anxiety. Centralized Decision Making: Strong leadership and centralized decision-making structures are crucial in both scenarios to navigate uncertainty and implement changes. Scarcity of Knowledge and Risk: Bounded rationality, limited information, and institutional knowledge gaps create planning and forecasting challenges. Supplier Problems: Convincing suppliers to work with startups or distressed companies is difficult due to creditworthiness concerns and uncertainty. Lack of Credibility with Lenders: Both startups and troubled companies may struggle to gain credibility with lenders due to financial distress or high-risk profiles. Equity Gains Opportunity: Both scenarios offer opportunities for equity gains due to low stock values. Successful turnarounds and startups can yield substantial rewards. In summary, managing turnarounds and entrepreneurship involves skillfully managing multiple constituencies, conserving cash, and establishing trust. Both require charismatic leadership, persuasion, and adaptability. This book emphasizes that entrepreneurship and innovation are integral to corporate renewal and recovery, in addition to reorganization and restructuring efforts. The causes of organizational distress can be categorized into two main groups: external causes and internal causes. External Causes: Economic Downturns: Economic crises, like the 2008 financial crisis, can negatively impact businesses by reducing consumer spending and causing financial challenges. Industrywide Issues: Structural changes within specific industries, such as consolidation or the emergence of new products, can affect businesses operating within those sectors. Shifts in Consumer Demand: Changes in consumer preferences and trends can lead to decreased revenue for companies that fail to adapt. Changes in Technology: Technological advancements can disrupt industries, rendering old products or business models obsolete. Government Regulation: Changes in regulations, whether through deregulation or new restrictions, can influence business operations and profitability.

Changing Interest Rates: Fluctuations in interest rates can affect a company's debt costs and cash flows. Internal Causes: Ineffective Management: Poor management practices, especially during times of crisis, can significantly contribute to a company's distress. Blind Pursuit of Growth: Companies that overly focus on growth through acquisitions or expansion without proper strategy can face management and operational challenges. Overextension of Credit: Companies that take on too much debt during prosperous times can struggle to manage their financial obligations during economic downturns. Insufficient Capital: Failing to anticipate downturns and secure adequate funding can leave companies unable to weather tough times. Fraud and Dishonesty: Misconduct ranging from fraudulent activities to manipulation of accounting information can harm a company's reputation and financial stability. Product Issues: Problems related to products, including recalls, mismanagement of product portfolios, and quality concerns, can damage a company's image and customer loyalty. It's important to diagnose and address these causes of distress to prevent and manage organizational decline effectively. Purchase orders - A company that wants to place an order can call or they can send a purchase order - A written order. - A purchase order has a bunch of commands, if they are followed the entity that places the order is legally required to pay for the order. - Money can be borrowed against the purchase order, you can sell a purchase order.

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Invoice - a list of goods or services provided, with a statement of the sum due for these - An invoice can only be valid/enforceable on a delivered product or service. - Must have a unique number, needs to tag a specific obligated party, and must say who the payment is for - It must state the manner of payment, the due date, and what happens if it is late. - If an invoice is proper, the recipient is legally forced to pay Chattel - Chattel is a legal status - Properly structured invoice or purchase order that can be pledged, sold, or supplied Accounts Receivable - Collection of receivables that have value if they are not passed due - Can be pledged as collateral - Late receivables show that a company is in trouble - In B2B Accounts Payable - Money owed to other people - A company is in trouble if they have a lot of payables A/R Aging - How companies' accounts receivable turn out over time A/P Aging - How much money they owe and how far out they owe it. Net 30 - Getting paid the full amount within 30 days of issuance. 2/10 Net 30 - 2% discount if paid within 10 days, due in 30 days. Capitalized Leases - Leases that show up on the balance sheet. - Grants ownership to the receiver at the end of the lease Covenants - Non-payment promises on a lease - Warranty EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

- The core cash flow of the company Cash Flow vs. GAAP accounting - Cash flow is different than profitability - Turnarounders care about cash flow, not profitability. - Cash is king. - Access to cash is what will turn around a business Uniform Commerical Code - Revised Article 9 - Details everything that must be known about collateralization and other things. Judgements - Piece of paper from court that says you can seize assets of the defendant. Liens - Good lien- notification, bad liens- when someone is trying to seize property - Happy or unhappy lien Tort litigation - The company can be sued by group of creditors that are owed by them. - Like a class action lawsuit What is a Z-score? Look at and weighs - X1 Liquidity -> working capital/total assets - X2 B/S Leverage -> Retained earning/Total Assets - X3 Profitability -> EBIT/Total Assets - X4 Valuation -> Market Equity Value/Total Liabilities - X5 Efficiency -> Sales/Total Assets Public = 1.2(X1) + 1.4(X2) + 3.3(X3) + .6(X4) + .999(X5) Private + .717(X1) + .847(X2) + 3.107(X3) + .420(X4) + .998(X5)

Chapter One (Shein) Phases of decline that a company can go through and the early warning signs that indicate trouble. It begins with an example of Ernst & Young partners settling charges related to their failure to spot issues at Bally Total Fitness. The chapter introduces the concept of an organizational distress curve, illustrating the five phases: blinded, inaction, faulty action, crisis, and dissolution. The blinded phase is when a company fails to recognize its problems and attributes declines in performance to temporary factors. In the inaction phase, the company's issues become more apparent, but management is still reluctant to take action, often due to irrational hope. The faulty action phase occurs when management finally takes action but may make the situation worse due to inaccurate information or incompetence. The crisis phase is characterized by severe financial problems, breached covenants, and employee departures. It's the last chance to salvage the company. The dissolution phase is the final stage, often leading to bankruptcy and asset liquidation. Early detection is crucial for a company's survival, as it allows for more effective action, better asset monetization, and reduced personal liability for management. The chapter emphasizes the importance of analyzing management effectiveness, trend analysis, industry comparisons, and diagnostic models like Altman's Z-score as early warning signs to address financial distress. This passage discusses the challenges faced by an emerging growth company that is experiencing rapid revenue growth. Despite the excitement and enthusiasm within the company, warning signs of impending difficulties are being overlooked due to a lack of time and training by the management team. Some of the warning signs include aging accounts receivable, inventory imbalances, quality control issues, aging accounts payable, and a lack of controls. The text also highlights a real-life example of a company that faced financial problems and had to make significant changes to its product lines and financial practices to avoid a crisis. It emphasizes the importance of treating vendors as business partners and seeking external assistance when necessary. To avoid becoming a turnaround case in the future, the passage recommends several key steps for emerging growth companies, including assessing and possibly restructuring the management team, implementing robust systems for tracking and analyzing business data, focusing on analytics to identify both problems and opportunities and practicing effective working capital management. Overall, the message is that while rapid growth is exciting, it can lead to financial challenges if not managed carefully, and proactive steps are essential to ensure sustainable and profitable growth.

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The provided text discusses various aspects related to corporate turnarounds and the challenges that businesses may face. It begins by illustrating a debt stack of a midsized private company and mentions that larger companies may have more complex debt structures. It then lists 23 common challenges or "business killers" that companies can encounter, including failure to adapt, bad luck, undercapitalization, overleveraging, lack of diversification, and more. The text also highlights warning signs that businesses should be aware of, such as declining customer base, falling sales, rising costs, and owner distraction. It emphasizes the importance of recognizing these signs early to prevent further troubles. Additionally, the text discusses the turnaround process and the factors that influence the success of a turnaround, including the business's reason for existence, creditor anger, personal guarantees, mental health of the CEO, cash flow, and balance sheet. It also considers the readiness of the team, prospects for a sale, and industry-specific levers available for the turnaround. Overall, the text provides insights into the challenges and considerations involved in corporate turnarounds. Collateral - Assets owned by you or your business that are pledged to a lender to ensure repayment. - 2 classes: - Real Property (Real Estate) and - Personal Property (Everything else): Equipment, inventory, accounts receivable, furniture, intangible. How does ‘Collateral’ work? - Governed by the UCC - Pledge - Assignments - Blanket liens - Perfection Subordinate lender Revolver - Type of loan you can borrow, like a credit card Current Ratio - Cash. inventory, accounts receivable

Cash conversion cycle (on quiz): diagnostic tool - It shows how quickly and efficiently a company can buy, sell and collect on its inventory - Measures the number of days between paying the vendor for the inventory and when the company receives the cash from its customer - Inventory turn + Average A/R Aging - Average A/P Aging Early signs of distress - Management Analysis - Trend Analysis Management Analysis - High charisma, low financial iq - Hire homogenous skill sets - Is management on the golf course? - Finger pointers - Set up “silos” enviortment External Causes of stress - Economic Downturn - Can be international, national or local - Impact numerous businesses at once - Significant ‘trickle-down’ effect External Causes of stress - Industrywide issues - Outside shocks that rattle through an entire industry - Create ‘trickle-down’ impacts in unexpected ways External Causes of stress - shifts in consumer demand - Consumer trends can be fickle and unpredictable - Companies must be prompt in reacting! External Causes of stress - Changes in technology - Are changes ‘sustainable’ or ‘disruptive’ - How will companies harness this change or will they be knocked over by it - Are tech improvements affordable External Causes of Stress -Government regulation External Causes of Stress -Changing interest rates - Impact cost of borrowing

Internal Causes of Distress - Blind pursuit of growth - Too much debt - Insufficient capital - Fraud & dishonesty - Product issues - Cash turnover Leadership Invest in Yourself What role does intelligence play in leadership development? Enhancers - Confident, authentic, competent, perspicacious, accountable, good communication, has power Neutralizers - better with ‘things’ than people, technically competent, rarely express emotions, use authority, short-medium term success. Diminishers - Rely on authority, intimidation, bullying, take more give less, manipulative, may enjoy short-term success, Awareness- clarity of destination Attitude- how do I develop?

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Activity- actions to ensure success Agreements - w/ myself and others Accountability- w/ myself and others Turnaround Leadership - Know yourself and your business - Hire the right people, lose the right people - Training is ongoing and not a one-time event - Communicate & engage with others about what success looks like. - Hold people accountable! Yourself too! - Celebrate success! Reward when appropriate! Leadership - “It is never too late to become the person you were always meant to be…” What will you always find on the scene? - Confusion, panic, & fear - Cash just ran out How should you appear? - Exude Confidence First steps to Establish Control - Control of your thoughts and reactions first - Then control your: cash, employees, customers Recommendations - There is no ‘leadership by committee - There must be a sacrificial lamb - Fire someone who deserves it. - Productive4 tension is good - Convert suspicion into teamwork - Entrepreneurs must ‘buy in’ - Small promises first, must follow through to deliver - Provide transparency whenever possible - Bullets analogy - Play amateur psychologist

Strategic Manifestations - P&L doesn’t matter. It’s all about the cash flow! - Have staff rate everyone on a scale 1-10 - Determine inherent strengths (is there a gross margin?) - Freeze accounts payable - Connect with all valued customers and vendors - Offer payment plans to valued vendors - Consider raising prices - Fire some customers Order in who gets paid first 1. Employees 2. Secured lender 3. subordinate secured lender 4. IRS 5. Unsecured lender 6. General creditors

EEE 422 notes

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